Documentary collection - banks act as intermediaries for trade documents and payments
- Trade documents are delivered to the buyer through the bank
- Banks follow the instructions of the seller
- Documentary collection is conducted under international regulations.
What is documentary collection?
Documentary collection is mainly used in international trade. With documentary collection, the seller of the goods sends the trade documents to their bank with the instructions to forward them to the buyer’s bank. The seller’s bank hands the trade documents over to the purchaser either against an immediate payment or an approved payment obligation, i.e. a bill of exchange.
We advise you to use documentary collection when you trust your trade partner. In case of a lack of trust or doubts about the solvency, we advise you to use a letter of credit.
Buyer’s advantages
- The payment can be made immediately prior to taking possession of the goods
- No need to apply for credit at the bank
- Allows prepayment to be avoided
- Simpler and cheaper than a letter of credit
Seller’s advantages
- The buyer can be sure that the buyer does not take possession of the trade documents before they have paid to the bank for the goods or accepted the bill of exchange
- Documents are handled by banks, which is more secure than sending the documents directly to the purchaser
- Simpler and cheaper than a letter of credit
Remember
- The buyer is under no obligation to purchase the trade documents from the bank
- The banks are under no obligation to verify the solvency of the purchaser or to guarantee the payments. The banks only act as intermediaries for the seller’s instructions and the outcome of the voluntary actions of the buyer
- Also, when a bill of exchange is accepted, concluding the payment on the payment date depends on the purchaser’s intention and solvency, even though the goods are already in their possession
Transaction procedure
The buyer and the seller agree on a settlement by means of documentary collection. The seller ships the goods and sends the trade documents to their bank, who in turn forwards them to the buyer’s bank along with the seller’s instructions.
The buyer’s bank is permitted to deliver the documents to the purchaser, in general, against cash or a bill of exchange.
The buyer’s bank sends the funds received through the bank to the seller or forwards the bill of exchange accepted by the purchaser to be paid on the payment date.
The buyer takes possession of the goods.
Types of documentary collection
In case of export collection, the trade documents are forwarded to the bank by the seller of the goods, i.e. the exporter. Along with the trade documents, they provide instructions to the bank on delivering the documents to the purchaser. Usually, the buyer can not take possession of the goods before they have paid for them or approved the payment obligation on the given payment term.
In case of import collection, trade documents along with instructions for the delivery of the documents arrive at the purchaser’s bank from abroad. In order to retrieve the documents from the bank, the buyer must follow the collection instructions, i.e. pay money or accept a bill of exchange.
